Flash Report /

Bangladesh Finance Bill: Passed in parliament with positive change for stock market

    IDLC Securities
    30 June 2019
    Published byIDLC Securities

    Taxation rules promoting cash dividend passed with modifications

    The National Parliament passed the Finance Bill for FY2019-20 on 29 June 2019 with a few modifications, including the proposed policy for taxation of retained earnings. The proposed budget had imposed a 15% tax on stock dividends, and 15% additional tax on retained earnings and reserves in excess of 50% of the paid-up capital of a company. This has now been modified in the following ways:

    • In any income year, a company can transfer a maximum 70% of NPAT to retained earnings and reserves without paying any tax penalty. In such a case, the remaining 30% (of NPAT) is to be declared as a cash dividend and/or stock dividend. If the transfer amount exceeds 70% of NPAT, the company will be subject to a 10% tax on the total amount transferred to retained earnings and reserves.
    • The regulation also suggests that the amount declared as cash dividend has to be at least equal to that of the stock dividend to avoid a tax penalty. If the amount declared as a stock dividend is greater than that of the cash dividend, the stock dividend will be subject to a 10% tax.

    These two clauses together imply that the dividend payout (cash) of a company has to be at least 15% in any income year. We consider this to be a positive move for the Bangladesh stock market. It will increase the overall dividend yield of the market from its current level of 3.6%. Note that out of 310 companies, only 179 companies declared a cash dividend in 2018 and we expect that number to increase significantly.

    In addition, the proposed increase in tax-free limit for a cash dividend (from BDT25,000 to BDT50,000) has been approved without any modification.